February 17, 2003
Volume 81, Number 07
CENEAR 81 07 pp. 85-90
ISSN 0009-2347


GROWING A BIOTECH INDUSTRY
Mid-Atlantic states compete to boost biotech industry fortunes and create jobs

CELIA M. HENRY, C&EN WASHINGTON

Planning to work in the biotechnology industry? Before you pack your bags for California or Massachusetts, take a look at the mid-Atlantic region. Each of the mid-Atlantic states (stretching from Virginia to New York) has programs designed to strengthen the biotech industry and to attract these high-tech employers to the state.

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PLUG-AND-PLAY LABS The commercialization center at the Technology Centre of New Jersey in New Brunswick provides lab space as small as 800 sq ft, allowing companies to move up from incubator facilities. NJEDA PHOTO

In the report "Signs of Life: The Growth of Biotechnology Centers in the U.S.," published by the Brookings Institution last year, three out of the nine metropolitan areas labeled as biotechnology centers are located in the mid-Atlantic region. Three more are in California, and the other three are in New England, Washington state, and North Carolina.

The ultimate goal of encouraging the development of the biotech industry is to bring jobs to the states, whether by growing companies from the ground up or by importing companies from other states. "Creating jobs is the bottom line of what we're all about," says Caren S. Franzini, executive director of the New Jersey Economic Development Authority.

According to a report commissioned by the Biotechnology Industry Organization (BIO), 41 states have initiatives aimed at the biotechnology industry, including 10 states with explicit biotechnology or life sciences strategic plans. The earliest of these strategic plans was adopted by Maryland in 1991. BIO is working with state governments, both the executive and legislative branches, to advise them about the needs of the biotech industry, says Patrick M. Kelly, vice president of state government and grassroots programs at BIO.

Kelly points out that biotech products can take more than 10 years to reach the market. "With that kind of protracted research and development time, it's very difficult to find a state and investors that are patient enough to wait for the benefit of the industry. We need patient capital; we need patient investors," he says. "Biotech is not a proposition that any entrepreneur gets into lightly."

ENCOURAGING STATES to be patient can be "tricky," Kelly says. "Particularly in economic development circles, state governments are incredibly competitive. It's very much 'keeping up with the Joneses.' If one state has had a remarkable success with a particular industry that is a high-value, high-skill, high-wage industry--like the biotech industry--a lot of states will seek to emulate what that state has put in place, to cultivate or grow that industry or industry cluster."

However, cultivating the biotechnology industry in a given location requires a strong research base and money. "Every successful cluster in the country is centered around a research-based entity of some kind, whether it's a university, college, or federal institution. Those are the drivers and real genesis machines for the industry," Kelly says.

Most of the mid-Atlantic states are building their biotechnology industries on already strong biological or biomedical research bases. For example, C. Robert Eaton, president of the nonprofit organization MdBio in Frederick, Md., attributes the success of biotechnology in Maryland to the presence of the National Institutes of Health in Bethesda. "I believe that there's a natural bioscience region that is about a 50-mile radius from NIH, with NIH at the epicenter. I think within that region is where you're going to find the real strength," he says.

Between the two of them, New Jersey and Pennsylvania are home to most of the major pharmaceutical companies, and this provides a strong base for biotechnology. "The pharmaceutical industry is the primary audience for what we're doing," says Barbara S. Schilberg, managing director and chief executive officer of BioAdvance in Philadelphia, part of a Pennsylvania life sciences initiative. "The global market is dominated by the pharmaceutical companies, all of whom are adopting biotechnology tools and even products. Having both the scientific resources here and the experienced workforce gives us an opportunity to combine the biotech and pharmaceutical businesses in a way that's difficult for companies in Boston and California. They typically have to recruit from our area to get experienced pharmaceutical people."

Fritz Bittenbender, president of the Pennsylvania Biotechnology Association, agrees that the concentration of pharmaceutical firms is a strength of the region. "These big pharma companies create management talent, which can then go and run these start-up biotech companies."


"We need patient capital; we need patient investors. Biotech is not a proposition that any entrepreneur gets into lightly."


IN CONTRAST, Delaware has needed to strengthen its biotech research base, according to Robert Dayton, a business representative in the Delaware Economic Development Office. Starting from a base of DuPont (chemicals and agricultural biotechnology), AstraZeneca (pharmaceuticals), and a cluster of biotechnology start-ups, the Delaware academic sector has increased its focus on biotechnology. The Delaware Biotechnology Institute (DBI)--a partnership between the Delaware state government, Delaware's academic institutions, and industry--was established to strengthen the state's research foundation. "To attract good jobs and new industries, you've got to have the incubation close to good science and good education," says David S. Weir, director of DBI.

Dayton says: "We recognized that in order for companies to thrive here, we need to build a research base. We have an industry research base. We're developing our academic research base in biotechnology. Clearly, a few years ago, the University of Delaware really did not have much of an existence in that area. AstraZeneca and DuPont," both with a major presence in Delaware, "were clamoring for that kind of research base close by."

Although DBI is an academic unit of the University of Delaware, it is located at the Delaware Technology Park, adjacent to, rather than directly on, the university campus. "We wanted to have a commercial aspect to the institute," Weir says. "You get the benefit of having academics in and out without any problem. At the same time, you have connection with the private sector. You break down the barriers that would exist if you were at different locations."

In addition to strong science, tax policy is a way that states boost biotech businesses. Tax credits are particularly popular. However, BIO's Kelly notes, "a credit is only good at some point when a company has a tax liability. A company that does not have a product on the market and won't have revenues from sales for 10 or 15 years can't really use a credit."

New Jersey devised a way for small biotech companies to put their tax credits to immediate use. High-tech companies with fewer than 225 employees, at least 75% of whom are located in New Jersey, can sell their R&D or net-operating-loss tax credits to other companies within the state. Companies buying the credits must pay at least 75% of their value (or as much above that as the market will bear) and then may apply the full value to their own tax liability. The program is capped at $40 million a year. Applications to participate are due each year in June.

Debbie Hart, president of the Biotechnology Council of New Jersey, estimates that the going rate in 2002 was 85 cents on the dollar. "It's been a great program," she says. "There are a couple of companies in New Jersey that would tell you they still exist today because of that program."

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ANOTHER SOURCE of funding for state biotech initiatives has been the financial settlement between the states and the tobacco industry. For example, Pennsylvania is allocating $2 billion from its share to fund a life sciences initiative, which includes $100 million to establish three life sciences "greenhouses" in different regions of the state.

"The life sciences initiative would not have happened without the tobacco settlement money," BioAdvance's Schilberg says. Former Pennsylvania governors Tom Ridge (now secretary of homeland security) and Mark Schweiker "wanted to do something that would improve public health, and they were smart to think about improving the economy at the same time," she says.

Each greenhouse received approximately $33 million to help move technology into the commercial sector. The greenhouses are nonprofits initially funded by the state, and they have different business plans designed to address their regions' particular challenges. For example, the Philadelphia region has a "wealth of science," Schilberg says, "but what we don't have is enough early-stage life sciences venture capital." BioAdvance has put $20 million in a "greenhouse fund." BioAdvance plans to invest $3 million in its first funding round this spring. The applications received--59 applications requesting a total of $25 million--indicate that the $3 million will scarcely make a dent in the region's need for early-stage capital, and that was without advertising the program, according to Schilberg.

The greenhouse fund has established rules that no more than $500,000 can go to a project in a single funding cycle. "Overall, given our industry requirements, it's not a lot of money, but it is more than we had before for seed funding," Schilberg says. "We're not trying to spread the money across 150 new companies. What we really want to do is identify 20 or so strong companies and get them well capitalized, make sure they have good management and multiple project opportunities to go with, and make sure those survive and thrive."

Money dispensed from the greenhouse fund will be investments rather than grants, so BioAdvance will hold an equity position in the companies receiving funding. "We're investing the money, so in theory the return could be self-sustaining in time," Schilberg says. However, given the timelines in the biotech industry, she anticipates a gap before the fund realizes a return on its investments and is looking at ways to bridge it.

Like Pennsylvania, New York is a large, diverse state. "We believe that because New York is so big, it's foolish to think that all of the money being put in one place is going to serve the whole state," says Karin A. Duncker, executive director of the New York Biotechnology Association (NYBA). "We believe that you should build on the strengths of the region. If you're investing in it like buckshot or scattering seeds like Johnny Appleseed, there's not enough money to go around to make a good investment." Instead, NYBA recommends that the state focus on building up three regional clusters--one in the downstate region near New York City, one near Albany, and one in western New York around Rochester and Buffalo.

In the current economic climate, financing is a challenge for early-stage companies, something that the state governments and biotechnology industry groups are trying to address. Even in a major financial center like New York state, companies face problems.

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BUILDING A BASE The Delaware Biotechnology Institute is strengthening Delaware's academic biotechnology base to attract companies to the state. University of Delaware graduate student Christina M. Catalano is separating proteins in Janine Sherrier's lab. PHOTO BY CAROL FEELEY/UNIVERSITY OF DELAWARE

"WE ARE THE CENTER of the capital world, but the struggle has always been to convince the financial community to invest in its own backyard," Duncker says. "We don't have to make the case to the financial community and the venture community to invest in biotech, because they already are. We have to convince them that there are viable investment options here in New York, and they just aren't aware of them."

Matt Gardner, director of the Maryland BioAlliance, believes that the problems in finding early-stage funding may not be unique to the mid-Atlantic. "Early-stage venture capital turns out to be one of the problems that our industry faces in the mid-Atlantic region," he says. "It's perceived here as a local challenge. It's possible that it's a national challenge, and it will improve when the economy improves."

Robert T. Skunda, president of the Virginia Biotechnology Research Park, says that his organization is starting to attract attention from the venture-capital community. "Just the existence of the research park and the growing number of companies that we have here is bringing established sources of venture capital from the Philadelphia to Atlanta area that is focused in life sciences on the East Coast of the U.S. They're now regularly stopping by, keeping in touch, and displaying an interest in wanting to see deals."

Virginia Biotechnology Research Park also houses an "incubator," which provides companies with lab space and shared facilities that they couldn't otherwise afford. It is a joint venture of the Commonwealth of Virginia, Virginia Commonwealth University, and the city of Richmond. The park is currently completing its eighth building and now includes multi- and single-tenant buildings for companies at all stages of development.

"We have companies that span the gamut from start-ups to large multinational companies located here," Skunda says. "The majority are still skewed to early-stage companies. I would say the average size is around 10 people. We've already had three companies graduate from the research park that are now publicly traded companies." More than 40 companies are currently located at the research park.

Skunda is planning to build a "step-up facility," which he describes as a "stage-two incubator." He says: "Some of the companies that start in the incubator facility and outgrow it are still not large enough, nor are they well enough established, that they are candidates to go into market-rate space on a long-term lease basis. Let's say a company needs 5,000 sq ft. This is beginning to exceed what we can put together in the incubator facility, but I would probably have a difficult time continuing to work with them on a short-term lease basis in market-rate space." As companies outgrow incubators, they often need lab space that is smaller than what is available at higher, market-based rates or can't afford to pay those rents.

New Jersey has worked to provide space for emerging young companies. The Economic Development Authority purchased a 50-acre facility from Johnson & Johnson and turned it into a bioscience technology center. The newest addition to the facility is a "commercialization center," Franzini says.

The commercialization center offers 17 units with 800 to 1,600 sq ft of lab space. In less than a year, 15 of the units have been leased, and already one company wants to move to larger facilities at the technology center. "It's doing just what we're hoping to do, which is attract smaller companies and have them continue to grow in New Jersey rather than having to look outside our state for space," Franzini says.

The commercialization center was designed with the needs of the industry in mind. "They really didn't have the wherewithal to go and buy the lab equipment and set up the lab themselves," Franzini says. "It's a plug-and-play lab facility. It's all there. The sinks are there; the hoods are there. They just need to bring in the vials and any other movable equipment into this space to start work." The center also has two people on staff to assist the burgeoning companies with business development issues.

In addition to developing homegrown biotech industries, states are also striving to attract outside companies that are relocating or building additional facilities. Hart says approximately 10 biotech and two pharmaceutical companies have moved to New Jersey in the past nine months.

Delaware has snagged a couple of companies. For example, NaPro Biotherapeutics, headquartered in Boulder, Colo., established a genomics service center in Newark. Incyte Genomics, based in Palo Alto, Calif., also opened a genomics center in Delaware. In addition, Delaware secured a major R&D facility from AstraZeneca, which Dayton estimates is bringing 2,500 new jobs into the state. He believes that NaPro and Incyte's Delaware facilities will grow to a couple of hundred people in the next couple of years.

Virginia also attracted a large pharmaceutical facility--an Eli Lilly manufacturing facility for diabetes-related products. Construction began last year, and initial operation is expected to commence in 2004, with the facility becoming fully operational in 2007. The facility should create more than 700 new jobs in Virginia.

The future looks bright for the biotech industry in the mid-Atlantic. MdBio's Eaton's assessment of the future of the biotech industry in Maryland could just as easily apply to the industries in the other mid-Atlantic states: "I see it continuing to grow and continuing to do well. It's not the kind of industry like we saw in the '90s with the IT boom, which just shot up exponentially overnight. I see a consistent, steady growth. There will be some companies that do very well and some companies that don't do so well, but on the whole, I think it will continue to grow steadily."



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